The Hunger Games took only three days to establish itself as a pop-culture phenomenon. The Canadian-incorporated production company that made the film will spend about six years reaping the rewards – which suddenly look to have grown substantially.
The Hunger Games, the first of a planned four-film series by Lions Gate Entertainment Corp. , blew through even the most optimistic of expectations for its opening weekend, pulling in North American box-office receipts of $155-million (U.S.) – the third-biggest domestic debut in history, behind 2011's Harry Potter and the Deathly Hallows: Part 2 and 2008's Batman-franchise film The Dark Knight. The film took in an additional $59-million in overseas theatres on the weekend, for a worldwide total of $214-million in its first three days.
Lions Gate's stock, which had already jumped 75 per cent since the start of the year as buzz surrounding the upcoming blockbuster grew, gained another 4.5 per cent to $15.18 (U.S.) on the New York Stock Exchange Monday. Analysts had been ramping up their forecasts for the box-office numbers for weeks, but most were still only looking at about $100-million for the opening weekend.
With projections for total domestic box-office now running as high as $400-million, several analysts increased their 12-month share-price targets for Lions Gate on Monday. They said the box-office numbers imply higher earnings down the line – from overseas, DVDs, video-on-demand and pay-per-view – in the coming fiscal year.
And The Hunger Games is just getting started. Lions Gate plans to release three more films over the next several years, based on the best-selling fiction series from author Suzanne Collins.
"It's huge," said James Marsh, analyst at Piper Jaffray & Co. in New York, who raised his 12-month price target to $22. "It's like you won a lottery, and you're going to win it three more times."
Most of Lions Gate's costs for the film are fixed – about $125-million for production, distribution, promotion and advertising. Meanwhile, the company gets roughly 50 per cent of the box-office haul. The vast bulk of a rising box-office take goes straight to its bottom line once the up-front costs are covered.
"This is a very high operating margin model," Mr. Marsh said.
Based on a new domestic box-office estimate of $375-million, Benjamin Mogil of Stifel Nicolaus in Toronto projected that Lion's Gate's net profits from the first Hunger Games film would be about $280-million. That's 75 per cent higher than his forecast of less than a week ago, when he had pegged the domestic box-office at about $250-million.
To put that in perspective, Lions Gate lost $53-million in its last fiscal year (ended March 31, 2011), and is expected to turn a small profit for the fiscal year ending this week.
All that will change in the next fiscal year, with The Hunger Games under the company's belt. Analysts' consensus earnings forecast for fiscal 2013 is about $1.30 a share – or roughly $185-million.
At that number, Lions Gate is trading at less than 18 times its projected earnings over the next 12 months – below its average of 21.5 times over the past four years, and cheaper than DreamWorks Animation SKG Inc., its closest peer among U.S. film-studio stocks.
The big early box-office numbers extend to analysts' projections for the entire Hunger Games franchise. Mr. Marsh now pegs Lions Gate's operating profits from the franchise at $2.4-billion over the next six years – 70 per cent higher than he had projected two weeks ago.
However, analysts cautioned, the windfall from Hunger Games won't last forever.
DreamWorks Animation , for example, rode high for several years on its Shrek franchise, which ended in 2010. Last year, the company's profit fell 82 per cent, its cash flow dropped 63 per cent, and its share price is less than half of what it was two years ago.